-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LYveE0hGBKPDH9hadaEZPa90fiSJLzm67ioEtEXptqpFLgKuX5fhPqqYj6gz52Tc 84NZy8pNbNQOPVWujsFJcw== 0001012870-00-006180.txt : 20001218 0001012870-00-006180.hdr.sgml : 20001218 ACCESSION NUMBER: 0001012870-00-006180 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001031 FILED AS OF DATE: 20001215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EON COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001084752 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 621482178 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26399 FILM NUMBER: 789716 BUSINESS ADDRESS: STREET 1: 4119 WILLOW LAKE BOULEVARD CITY: MEMPHIS STATE: TN ZIP: 38118 BUSINESS PHONE: 9013657774 MAIL ADDRESS: STREET 1: 4119 WILLOW LAKE BOULEVARD CITY: MEMPHIS STATE: TN ZIP: 38118 FORMER COMPANY: FORMER CONFORMED NAME: CORTELCO SYSTEMS INC DATE OF NAME CHANGE: 19990421 10-Q 1 0001.txt FORM 10-Q: PERIOD ENDED 10/31/2000 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended October 31, 2000. [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ____ to ____. Commission file number 000-26399 EON COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 62-1482176 (State of incorporation) (I.R.S. Employer Identification No.) 4105 Royal Drive NW, Suite 100, Kennesaw, Georgia 30144 (Address of principal executive office) (770) 423-2200 (Telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date: 11,980,034 shares of Common --------------------------- Stock, $.001 par value, as of November 30, 2000. - ----------------------------------------------- EON COMMUNICATIONS CORPORATION FORM 10-Q QUARTER ENDED OCTOBER 31, 2000 INDEX Page ---- Part I: FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of October 31, 2000 and July 31, 2000..................................................... 2 Consolidated Statements of Operations for the Three Months Ended October 31, 2000 and October 31, 1999....................... 3 Consolidated Statements of Cash Flows for the Three Months Ended October 31, 2000 and October 31, 1999....................... 4 Notes to Consolidated Financial Statements......................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 7 Item 3. Qualitative and Quantitative Disclosure about Market Risk.... 13 Part II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ............................ 13 Signature............................................................. 13 -1- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EON COMMUNICATIONS CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) October 31, 2000 and July 31, 2000 (Dollars in thousands)
October 31, 2000 July 31, 2000 ---------------- ------------- ASSETS Current assets: Cash and cash equivalents .......................................... $ 1,503 $ 2,473 Marketable securities .............................................. 10,427 16,337 Trade accounts receivable, net ..................................... 15,274 12,381 Inventories ........................................................ 10,730 11,453 Income tax receivable .............................................. 1,650 1,200 Other current assets ............................................... 2,234 1,933 ------- ------- Total current assets ............................................ 41,818 45,777 Property and equipment, net .......................................... 3,532 2,416 Other assets: Goodwill, net ...................................................... 10,815 10,961 Intangible assets, net ............................................. 213 239 Other assets ....................................................... 431 499 ------- ------- Total other assets .............................................. 11,459 11,699 ------- ------- Total assets ......................................................... $56,809 $59,892 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Dividend payable ................................................... $ 46 $ 46 Trade accounts payable ............................................. 4,853 5,049 Accounts payable to ACT Manufacturing .............................. 273 1,070 Payable to affiliate ............................................... 430 89 Accrued expenses and other ......................................... 3,312 3,684 ------- ------- Total current liabilities ....................................... 8,914 9,938 Commitments and contingencies ........................................ - - Stockholders' equity: Common stock ....................................................... 12 12 Additional paid-in capital ......................................... 56,683 57,585 Accumulated deficit ................................................ (8,536) (7,379) Note receivable from affiliate ..................................... (264) (264) ------- ------- Total stockholders' equity ...................................... 47,895 49,954 ------- ------- Total liabilities and stockholders' equity: .......................... $56,809 $59,892 ======= =======
See notes to consolidated financial statements. -2- EON COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended October 31, 2000 and 1999 (Dollars in thousands, except per share data)
Three Months Ended October 31, 2000 1999 --------------- -------------- Net revenues ........................................... $12,338 $14,343 Cost of revenues ....................................... 7,446 7,926 --------- --------- Gross profit .................................... 4,892 6,417 Operating expenses: Selling, general and administrative ............. 5,200 4,664 Research and development ........................ 1,235 900 Amortization of goodwill ........................ 147 148 --------- --------- Total operating expenses .................... 6,582 5,712 Income (loss) from operations .......................... (1,690) 705 Interest expense ....................................... - 116 Interest income ........................................ (242) - Other expense (income), net ............................ 79 (9) --------- --------- Income (loss) before income tax expense (benefit) (1,527) 598 Income tax expense (benefit) ........................... (370) 263 --------- --------- Net income (loss) ............................... $(1,157) $ 335 ========= ========= Net income per common share: Basic ........................................... $(0.09) $0.04 Diluted ......................................... $(0.09) $0.04 See notes to consolidated financial statements
-3- EON COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended October 31, 2000 and 1999 (Dollars in thousands)
Three Months Ended October 31, CASH FLOWS FROM OPERATING ACTIVITIES: 2000 1999 Net income (loss) ............................................................................... $(1,157) $ 335 Adjustments to reconcile net income(loss) to net cash used in operating activities: Depreciation .................................................................................. 220 125 Amortization of intangibles ................................................................... 26 34 Amortization of goodwill ...................................................................... 146 148 Amortization of deferred financing costs ...................................................... --- 23 Provision for the allowance for doubtful accounts ............................................. 271 222 Equity in earnings of joint venture ........................................................... (3) (7) Changes in net assets and liabilities: Trade accounts receivable ................................................................ (3,164) (848) Accounts receivable from/payable to affiliate ............................................ 341 (85) Inventories .............................................................................. 723 (2,875) Other current assets ..................................................................... (301) (100) Other non-current assets ................................................................. 71 (284) Trade accounts payable ................................................................... (196) 2,515 Accounts payable to ACT Manufacturing, Inc. .............................................. (797) 1,026 Accrued expenses and other ............................................................... (372) 438 Income taxes receivable/payable .......................................................... (450) (1,233) ------- ------- Net cash used in operating activities ........................................... (4,642) (566) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ............................................................. (1,336) (388) Sales of available for sale securities .......................................................... 5,910 - Net repayments under notes receivable from employees ............................................ - 2 ------- ------- Net cash provided by (used in) investing activities ................................ 4,574 (386) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under revolving line of credit ...................................... - 1,065 Deferred offering costs ......................................................................... - (283) Proceeds from ESPP and stock option exercises ................................................... 181 - Purchase of treasury stock ...................................................................... (1,083) - ------- ------- Net cash provided by (used in) financing activities .............................. (902) 782 Net decreased in cash and cash equivalents ............................................. (970) (170) Cash and cash equivalents, beginning of period ..................................................... 2,473 1,874 ------- ------- Cash and cash equivalents, end of period .......................................................... $ 1,503 $ 1,704 ======= ======= See notes to consolidated financial statements.
-4- EON COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) Three Months Ended October 31, 2000 and 1999 (Dollars in thousands) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared by eOn Communications Corporation (the "Company") without audit. It is management's opinion that these statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the financial position, results of operations, and cash flows as of October 31, 2000 and for all periods presented. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto as of July 31, 2000 and 1999 and for each of the three years in the period ended July 31, 2000, which are included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging," which established standards of accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The provisions of this statement are effective for fiscal years beginning after June 15, 2000. Management has determined the adoption of this statement will not have a material impact on the results of operations or financial position of the Company. 2. EARNINGS PER SHARE The computations of basic and diluted earnings per share were as follows: Three Months Ended October 31, 2000 1999 (In thousands, except per share data) Basic earnings (loss) per share: Net income (loss)...................................... $ (1,157) $ 335 Weighted average shares outstanding - basic............ 12,213 7,640 ------------- ---------- Basic earnings per share................................... $ (0.09) $ 0.04 ============= ========== Diluted earnings (loss) per share:......................... Net income (loss)...................................... $ (1,157) $ 335 Weighted average shares:................................... Outstanding............................................ 12,213 7,640 Assumed conversion of preferred stock.................. - 1,435 Dilutive effect of stock options....................... - 283 ------------- ---------- Weighted average shares outstanding - diluted.......... 12,213 9,358 ------------- ---------- Diluted earnings (loss) per share.......................... $ (0.09) $ 0.04 ============= ==========
Potential common shares related to assumed exercise of outstanding stock options were excluded from the computation of diluted earnings per share for period ended October 31, 2000 because their inclusion would have had an antidulitive effect on earnings per share. -5- 3. INVENTORIES Inventories consist of the following:
October 31, July 31, 2000 2000 ---------- -------- (In thousands) Raw materials and purchased components............. $ 4,414 $ 4,126 Finished goods..................................... 6,364 7,375 LIFO reserve....................................... (48) (48) ------- ------- Total inventories.............................. $10,730 $11,453 ======= =======
4. STATEMENT INFORMATION
Communications Systems- North America Caribbean/Latin Consolidated (In thousands) America Other Reconciliations Total -------------- --------------- ----- --------------- ------------ Three months ended October 31, 2000: Revenues............................. $ 6,312 $ 6,026 $ 179 $ (179) $ 12,338 Income from continuing operations.... (1,099) (61) 8 (5) (1,157) Total assets......................... 47,342 9,467 891 (891) 56,809 Three months ended October 31, 1999: Revenues............................. $ 9,912 $ 4,431 $ 72 $ (72) $ 14,343 Income from continuing operations.... 98 237 (12) 12 335 Total assets......................... 31,432 11,738 1,133 (1,133) 43,170
There have been no differences from the last annual financial statements in the basis of measuring segment profit or loss. There have been no material changes in the amount of assets for any operating segment since the last annual financial statements. 5. CHANGES IN STOCKHOLDERS' EQUITY The following represents the changes in stockholders' equity for the three months ended October 31, 2000: In thousands, except share data
Note Receivable from Common Stock Additional Affiliate ---------------------- Paid in Accumulated (former Stockholders' Shares Amount Capital Deficit parent) Equity ---------- ------ ------- ------- --------- ------- Balance as of July 31, 2000..... 12,264,446 $12 $57,585 $(7,379) $(264) $49,954 Net income (loss) and comprehensive income (loss).... - - - (1,157) - (1,157) Repurchase of common stock...... (323,500) - (1,083) - - (1,083) Issuance of common stock under employee stock plan...... 59,431 - 174 - - 174 Exercise of stock options....... 3,567 - 7 - - 7 ---------- --- ------- ------- ----- ------- Balance at October 31, 2000..... 12,003,944 $12 $56,683 $(8,536) $(264) $47,895 ========== === ======= ======= ===== =======
-6- 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are those that express management's views of future events, developments, and trends. In some cases, these statements may be identified by terminology such as "may," "will," "should," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of such terms and other comparable expressions. Forward-looking statements include statements regarding our anticipated or projected operating performance, financial results, liquidity and capital resources. These statements are based on management's beliefs, assumptions, and expectations, which in turn are based on the information currently available to management. Information contained in these forward- looking statements is inherently uncertain, and our actual operating performance, financial results, liquidity, and capital resources may differ materially due to a number of factors, most of which are beyond our ability to predict or control. Factors that may cause or contribute to such differences include, but are not limited to, eOn's ability to compete successfully in its industry and to continue to develop products for new and rapidly changing markets. We also direct your attention to the risk factors affecting our business that are discussed below. eOn disclaims any obligation to update any of the forward-looking statements contained in this report to reflect any future events or developments. The following discussions should be read in conjunction with our consolidated financial statements and the notes included thereto. Overview We design, develop and market next-generation communications servers and software for the integration and management of voice, e-mail, and Internet communications for customer contact centers and other applications. For small and medium-sized installations, we offer a traditional voice-switching platform. Through our Caribbean/Latin American operations, we sell and service communications systems and cellular telephones and resell cellular airtime. Our products help enterprises communicate more effectively with customers, convert inquiries into sales, and increase customer satisfaction and loyalty. We recognize revenues from our eQueue and eNterprise communications server products upon completion of installation when they are sold directly to end users, due to the customized nature of each installation. We recognize revenues upon shipment for products shipped to dealers and for our Millennium products sold to end-users. We recognize revenues from the resale of cellular airtime and cellular telephones when these revenues are earned. Net revenues in quarters ending January 31 usually decline from the previous quarter, reflecting seasonal factors that affect some of our customers. U.S. government customers typically make substantial purchases during the quarters ending October 31, the last quarter of the government's fiscal year, and these purchases decline significantly in the following quarter. Customers in such markets as contact centers, education, and retail also have seasonal buying patterns and do not purchase substantial amounts of equipment during the quarters ending January 31. Three Months Ended October 31, 2000 and 1999 Net Revenues. Total revenues decreased 14.0% to $12.3 million in the quarter ended October 31, 2000 from $14.3 million in the quarter ended October 31, 1999. Sales of communications systems in the U.S. declined $3.6 million, which were offset by increased revenues in our Caribbean and Latin America operations of $1.6 million. The volume decline in the U.S. from Q1 2000 to Q1 2001 resulted primarily from purchases by customers in Q1 2000 related to Year 2000 upgrades. The increase in Caribbean and Latin America was due primarily to increased revenues from the sale of wireless phones. Cost of Revenues and Gross Profit. Cost of revenues consists primarily of purchases from our contract manufacturers and other suppliers and costs incurred for final assembly, quality assurance and installation of our systems. Gross profit decreased 23.8% to $4.9 million in the quarter ended October 31, 2000 from $6.4 million in the quarter ended October 31, 1999. The decrease resulted primarily from decreased communications systems gross profit of $1.7 million, offset by increased gross margin from our Carribbean/Latin American operations of $0.2 million. Our gross margin was 39.6% in the quarter ended October 31, 2000 and 44.7% in the quarter ended October 31, 1999. The lower gross margin in the current quarter was due primarily to the increase in the sale of lower margin wireless products in the Caribbean and Latin America. Operating Expenses. Operating expenses increased 15.2% to $6.6 million in the quarter ended October 31, 2000 from $5.7 million in the quarter ended October 31, 1999. The increased expenses in the current quarter were due primarily to increased expenditures for research and development, as well as increased marketing and sales expenses. Operating expenses increased as a percentage of revenues to 53.3% in the quarter ended October 31, 2000 from 39.8% in the quarter ended October 31, 1999. Selling, General and Administrative. Selling, general and administrative expenses consist primarily of salaries and benefit costs, advertising and trade show related costs, and facilities and other overhead expenses incurred to support our business. Selling, general and administrative -7- expenses increased 11.5% to $5.2 million in the quarter ended October 31, 2000 from $4.7 million in the quarter ended October 31, 1999. The increase was primarily due to increased marketing expenses and the hiring of additional sales and customer service personnel to support anticipated growth of the business. These expenses as a percentage of revenues increased to 42.1% in the quarter ended October 31, 2000 from 32.5% in the quarter ended October 31, 1999. Research and Development. Research and development expenses consist primarily of personnel and related expenses for our engineering staff and depreciation of related equipment. Research and development expenses increased 37.2% to $1.2 million in the quarter ended October 31, 2000 from $0.9 million in the quarter ended October 31, 1999. The increased expenses were primarily due to the hiring of additional engineers to support the development efforts of our communication server products and related software applications. These expenses as a percentage of revenues increased to 10.0% in the quarter ended October 31, 2000 from 6.3% in the quarter ended October 31, 1999. Amortization of Goodwill. We recorded $11.7 million of goodwill related to the acquisition of BCS Technologies, Inc. in April 1999 and are amortizing the amount over a 20-year period. Interest income and expense. We had no interest expense in the current quarter. Interest expense was $0.1 million in the quarter ended October 31, 1999. Interest expense declined due to the retirement of all outstanding debt in connection with our initial public offering in February 2000. Interest income was $0.2 million in the current quarter. We had no interest income in the quarter ended October 31, 1999. The increase was due to the investment of funds from our initial public offering in interest-bearing available for sale securities. Other income and expense. Other expense was $0.1 million and $0.0 million in the quarters ended October 31, 2000 and 1999, respectively. The increase in the current quarter included the recognition of a loss on marketable securities from an investment in equity securities of a publicly traded company. Income tax expense and benefit. Income tax expense (benefit) for the quarter ended October 31, 2000 was ($0.4) million, a decrease of 240.7% from $0.2 million for the quarter ended October 31, 1999. The benefit in the current quarter resulted primarily from the carryback of operating losses to prior periods to realize a tax refund. Liquidity and Capital Resources Net cash used in operating activities was ($4.6) million and ($0.6) million for the three months ended October 31, 2000 and 1999, respectively. The decrease from the prior year was due primarily to lower net income in the current fiscal quarter of ($1.5) million and an increase in accounts receivable of $3.2 million. The majority of the increase in accounts receivable resulted from an expansion of our sales of wireless phones and airtime for third-party carriers in our Caribbean/Latin America operations. We do not anticipate further growth of accounts receivable in the near future as we expect collections in our wireless business and Communications Systems - North America operations to improve. Net cash provided by (used in) investing activities was $4.6 million and ($0.4) million for the three months ended October 31, 2000 and 1999, respectively. Cash provided by investing activities in the current period consisted primarily of $5.9 million from sales of short-term available-for-sale debt securities, offset by purchases of property and equipment of ($1.3) million. The majority of the property and equipment purchases were non-recurring expenditures for leasehold improvements and related equipment at our facility in Memphis, Tennessee. Net cash provided by (used in) financing activities was ($0.9) million and $0.8 million for the three months ended October 31, 2000 and 1999, respectively. Cash used in financing activities in the current quarter consisted primarily of purchases of common stock under the Company's stock repurchase program. We believe that our available funds will satisfy our projected working capital and capital expenditure requirements at least through calendar year 2001. To the extent future revenues are not realized or we grow more rapidly than expected, we may need additional cash to finance our operating and investing activities. ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS The following risk factors and other information contained in this report should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that are not currently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occurs, our business, financial condition, and operating results could be materially adversely affected. In addition to the other information included in this report, the following factors should be considered in evaluating our business and future prospects. -8- Fluctuations in our quarterly operating results could cause our stock price to decline. Future operating results are likely to fluctuate significantly from quarter to quarter. Factors that could affect our quarterly operating results include: . delays or difficulties in introducing new products; . increasing expenses without commensurate revenue increases; . variations in the mix of products sold; . variations in the timing or size of orders from our customers; . declining market for traditional private branch exchange (PBX) equipment; . delayed deliveries from suppliers; and . price decreases and other actions by our competitors. Our quarterly operating results are also likely to fluctuate due to seasonal factors. Some of our vertical markets, such as the U.S. government and educational and retail buyers, follow seasonal buying patterns and do not make substantial purchases during the quarters ending January 31. Thus, revenues in the quarters ending January 31 are often lower than in the previous quarters. Because of these and other factors, our operating results may not meet expectations in some future quarters, which could cause our stock price to decline. We may not successfully introduce new products that are planned for the near future which could harm our business and financial condition. We plan to introduce new products in the near future to serve the evolving contact center and e-commerce markets. These new products must achieve market acceptance, maintain technological competitiveness and meet increasing customer requirements. New products may require long development and testing periods. Significant delays in the development, release, installation or implementation of new products could harm our business and financial condition. Planned increases in operating expenses to develop and sell new products may result in operating losses. We intend to increase our operating expenses substantially, particularly expenses related to research and development, sales and marketing, and development of new distribution channels. We will need to generate significant additional revenue to attain profitability. If we incur losses, our stock price could decline. Our communications servers and software face intense competition from many companies that have targeted our markets. The competitive arena for our products is changing very rapidly and we face intense competition in our markets. Well-established companies and many emerging companies are scrambling to develop products to improve customer service in e- commerce. While the industry remains fragmented, it is rapidly moving toward consolidation, driven by both emerging companies' desires to expand product offerings and resources and established companies' attempts to acquire new technology and reach new market segments. A number of emerging companies have completed initial public offerings in recent months, while many more remain private. More established competitors, as well as those emerging companies that have completed initial public offerings, currently have greater resources and market presence than we do. Additionally, a number of our current and potential competitors have recently been acquired by larger companies who seek to enter our markets. -9- We expect competition to intensify as competitors develop new products, competitors gain additional financial resources from public offerings, new competitors enter the market, and companies with complementary products enter into strategic alliances. Our current and potential competitors can be grouped into the following five categories: . data communications equipment suppliers, such as Cisco Systems, 3Com and Sun Microsystems; . web center software and services suppliers, such as eGain, Kana Communications, Quintus, E.piphany, and WebLine Communications (acquired by Cisco); . contact center software and services suppliers, such as Aspect Communications, Clarify (acquired by Nortel Networks), Genesys Telecommunications Laboratories (acquired by Alcatel), Interactive Intelligence, Kana Communications, and Vantive (acquired by PeopleSoft); . emerging private communications exchange (PCX) suppliers, such as AltiGen Communications, Artisoft, Cisco Systems, NBX Corporation (acquired by 3Com); and . voice communications equipment suppliers, such as Alcatel, Aspect Communications, Lucent Technologies, Mitel, NEC, Nortel Networks, Rockwell Electronic Commerce and Siemens. Many of our current and potential competitors have significantly greater financial, technical, marketing, customer service and other resources, greater name and brand recognition and a larger installed customer base than we do. Therefore, our competitors may be able to respond to new or emerging technologies and changes faster than we can. They may also be able to devote greater resources to the development, promotion and sale of their products. Actions by our competitors could result in price reductions, reduced margins and loss of market share, any of which would damage our business. We cannot assure you that we will be able to compete successfully against these competitors. If we are unable to increase our sales capability, we may not be able to grow or sustain our business. We must expand our sales force in order to increase our revenues. If we fail to do so, our business, operating results and financial condition could be harmed. We must recruit, train and retain additional direct sales personnel. It may take a new sales person months to become a productive member of our direct sales force, if ever. New sales personnel, dealers and value added resellers might not be effective in increasing sales. If we cannot develop a new indirect sales channel to sell our eNterprise communications servers, our ability to generate revenue would be harmed. We sell our eQueue communications servers directly and our eNterprise and Web Center communications servers both directly and indirectly through dealers and value added resellers that have experience in data as well as voice communications. We may not be able to develop this new indirect sales channel. In addition, these new distribution partners may devote fewer resources to marketing and supporting our products than to our competitors' products and could discontinue selling our products at any time in favor of our competitors' products or for any other reason. The lengthy sales cycles of some of our products and the difficulty in predicting the timing of our sales may cause fluctuations in our quarterly operating results. The uncertainty of our sales cycle makes the timing of sales difficult to predict and may cause fluctuations in our quarterly operating results. Our sales cycles generally vary from four to twelve months for our eQueue communications servers and from one to six months for our Millennium voice switching platform and eNterprise communications servers. The purchase of our products may involve a significant commitment of our customers' time, personnel, financial, and other resources. We generally recognize revenues on the date of shipment for Millennium and eNterprise systems shipped to dealers and upon completion of installation for our eQueue and eNterprise communications servers sold directly to end users due to the customized nature of these installations. Also, it is difficult to predict the timing of indirect sales because we have little control over the selling activities of our dealers and value added resellers. We incur substantial sales and marketing expenses and spend significant management time before customers place orders with us, if at all. Revenues from a specific customer may not be recognized in the quarter in which we incur related sales and marketing expense, which may cause us to miss our revenues or earnings expectations. If the acceptance of the Linux operating system does not continue, our ability to market our products could be adversely affected. -10- Our next-generation communications servers run on the Linux operating system. Our products also incorporate application software developed specifically for the Linux operating system. Our ability to market our products could be adversely affected and we may incur significant development costs if: . the Linux operating system does not evolve to meet changing market needs; . new applications are not developed for the Linux operating system; or . other operating systems, such as Microsoft Windows NT, reduce the recent growing acceptance of Linux. In addition, any other factor that reduces acceptance of the Linux operating system could also reduce acceptance of our products and harm our business, results of operations and financial condition. Our products must respond to rapidly changing market needs and integrate with changing protocols to remain competitive. The markets for our products are characterized by rapid technological change, frequent new product introductions, uncertain product life cycles and changing customer requirements. If we are not able to rapidly and efficiently develop new products and improve existing products to meet the changing needs of our customers and to adopt changing communications standards, our business, operating results and financial condition would be harmed. Key features of our products include integration with standard protocols, computer telephony integration and automatic call distribution applications and protocols, operating systems and databases. If our products cannot be integrated with third-party technologies or if they do not respond to changing market needs, we could be required to redesign our products. Redesigning any of our products may require significant resources and could harm our business, operating results and financial condition. If we are not be able to grow or sustain our Millennium voice switching platform revenues, our business, operating results and financial condition could be harmed. We derived approximately 36% and 39% of our total revenues from the sale of Millennium products for the quarter ended October 31, 2000 and for the year ended July 31, 2000, respectively. We may not be able to grow or sustain our Millennium revenues because the traditional private branch exchange (PBX) market, which accounts for a substantial portion of our Millennium revenues, is declining. One reason for the decline of the traditional PBX market is the emergence of voice switching platforms based on standard PCs. If we are not able to grow or sustain our Millennium voice switching platform revenues, our business, operating results and financial condition could be harmed. In addition, approximately half of Millennium revenues are derived from dealers and value added resellers who have no obligation to sell our products. Therefore, dealers and value added resellers could discontinue selling our products at any time in favor of our competitors' products or for any other reason. A reduction or loss of orders from our dealers and value added resellers could harm our business, operating results and financial condition. Delayed deliveries of components from our single source suppliers or third-party manufacturers could reduce our revenues or increase our costs. We depend on sole source suppliers for certain components, digital signal processors and chip sets, voice processor boards, wireless handsets and base stations. Interruptions in the availability of components from our key suppliers could result in delays or reductions in product shipments, which could damage our customer relationships and harm our operating results. Finding alternate suppliers or modifying product designs to use alternative components may cause delays and expenses. Further, a significant increase in the price of one or more third-party components or subassemblies could reduce our gross profit. We depend upon our primary contract manufacturers ACT manufacturing, Inc., Innovative Circuits, and Clover Electronics. We may not be able to deliver our products on a timely basis if any of these manufacturers fail to manufacture our products and deliver them to us on time. In addition, it could be difficult to engage other manufacturers to build our products. Our business, results of operations and financial condition could be harmed by any delivery delays. We may be unable to hire and retain engineering and sales and marketing personnel necessary to execute our business strategy. Competition for highly qualified personnel is intense due to the limited number of people available with the necessary technical skills, and we may not be able to attract, assimilate or retain such personnel. If we cannot attract, hire and retain sufficient qualified personnel, we may not be able to successfully develop, market and sell new products. -11- Our business could be harmed if we lose principal members of our management team. We are highly dependent on the continued service of our management team. The loss of any key member of our management team may substantially disrupt our business and could harm our business, results of operations and financial condition. In addition, replacing management personnel could be costly and time consuming. We are effectively controlled by our principal stockholders and management, which may limit your ability to influence stockholder matters. As of November 30, 2000, our executive officers, directors and principal stockholders and their affiliates owned 4,710,463 shares, or 38.75% of the outstanding shares of common stock. Thus, they effectively control us and direct our affairs, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control of our company and some transactions may be more difficult or impossible without the support of these stockholders. The interests of these stockholders may conflict with those of other stockholders. We also conduct transactions with businesses in which our principal stockholders maintain interests. We believe that these transactions have been conducted on an arm's length basis, but we cannot assure you that these transactions would have the same terms if conducted with unrelated third parties. We may not be able to protect our intellectual property, and any intellectual property litigation could be expensive and time consuming. Our business and competitive position could be harmed if we fail to adequately protect our intellectual property. Although we have filed patent applications, we are not certain that our patent applications will result in the issuance of patents, or that any patents issued will provide commercially significant protection to our technology. In addition, as we grow and gain brand recognition, our products are more likely to be subjected to infringement litigation. We could incur substantial costs and may have to divert management and technical resources in order to respond to, defend against, or bring claims related to our intellectual property rights. In addition, we rely on a combination of patent, trademark, copyright and trade secret laws and contractual restrictions to establish and protect our proprietary rights. These statutory and contractual arrangements may not provide sufficient protection to prevent misappropriation of our technology or to deter independent third-party development of similar technologies. Any litigation could result in our expenditure of funds, management time and resources. Our products may have undetected faults leading to liability claims, which could harm our business. Our products may contain undetected faults or failures. Any failures of our products could result in significant losses to our customers, particularly in mission-critical applications. A failure could also result in product returns and the loss of, or delay in, market acceptance of our products. In addition, any failure of our products could result in claims against us. Our purchase agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. However, the limitation of liability provisions contained in our purchase agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage may not adequately cover all possible claims asserted against us. In addition, even claims that ultimately are unsuccessful could be expensive to defend and consume management time and resources. Our charter contains certain anti-takeover provisions that may discourage take- over attempts and may reduce our stock price. Our board of directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the preferences, rights and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of common stock may be harmed by the rights of the holders of any preferred stock that may be issued in the future. Certain provisions of our certificate of incorporation and bylaws may make it more difficult for a third party to acquire control of us without the consent of our board of directors, even if such changes were favored by a majority of the stockholders. These include provisions that provide for a staggered board of directors, prohibit stockholders from taking action by written consent and restrict the ability of stockholders to call special meetings. Future sales of shares may decrease our stock price. Sales of substantial amounts of our common stock in the public market after our initial public offering, including shares issued upon the exercise of outstanding options, or the perception that such sales could occur, could reduce the market price of our common stock. These sales also might make it more difficult for us to raise funds through future offerings of common stock. -12- We may have a contingent liability arising out of a possible violation of section 5 of the Securities Act in connection with the posting of materials on an underwriter's website. Prior to January 10, 2000, a copy of the registration statement for eOn's initial public offering was posted on the website of W.R. Hambrecht + Co., Inc., an underwriter for our initial public offering, which included a prospectus that did not contain preliminary pricing information as required by Section 10 of the Securities Act. We urge all persons to read and base their investment decision only on the preliminary prospectus dated January 10, 2000, which contained the preliminary pricing information, and the final prospectus. If this posting did constitute a violation of the Securities Act, then any purchasers in this offering who viewed this posting would have the right, for a period of one year from the date of their purchase of the common stock, to bring an action for rescission or for damages resulting from their purchase of common stock. We believe that any exposure we may have will not be material. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." We are required to adopt SFAS No. 133, as amended by SFAS No. 138, for the year ending July 31, 2001. SFAS No. 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities. We have determined that the adoption of this statement will not have a material impact on the results of operations of financial position of the Company. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements. SAB No. 101 summarizes the staff's various views in applying generally accepted accounting principles to revenue recognition in financial statements. We have evaluated our revenue recognition policies and concluded that they comply with this SAB. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK Substantially all of our cash equivalents and available-for-sale securities are invested in variable rate instruments with frequent rate resets. Because these securities have short effective maturities, we believe the market risk for such holdings is insignificant. In addition, the vast majority of our sales are made in U.S. dollars, and consequently, we believe that our foreign exchange rate risk is immaterial. We do not have any derivative instruments and do not engage in hedging transactions. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (A) Exhibits. See Exhibit Index following the signature section of this report. (B) Reports On Form 8-K. We did not file any reports on Form 8-K during the quarter ended October 31, 2000. SIGNATURE Pursuant to the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized. EON COMMUNICATIONS CORPORATION Date: December 15, 2000 \s\ Lanny Lambert ----------------- ------------------------------ Lanny Lambert Chief Accounting Officer -13- EXHIBIT INDEX Documents listed below are being filed as exhibits herewith. Exhibits identified by asterisks (*) are being incorporated herein by reference and, pursuant to Rule 12b-32 of the General Rules and Regulations promulgated by the Commission under the Securities Exchange Act of 1934, reference is made to such documents as previously filed exhibits with the Commission. Exhibit Number Description of Document - ------- ----------------------------------------------------------------------- 3.1* Amended and Restated Certificate of Incorporation of eOn as filed with the Secretary of State of Delaware on November 16, 1999. 3.2* Amended and Restated Bylaws of eOn 4* Reference is made to Exhibits 3.1 and 3.2 10.1* Promissory Note issued by Cortelco Systems Holding Corporation in favor of eOn, dated as of July 31, 1997. 10.2* Form of Indemnity Agreement between eOn and its officers and directors. 10.3* Manufacturing Agreement between eOn and CMC Manufacturing, Inc., dated as of August 1, 1998. 10.4* Employment Agreement, dated as of April 12, 1999, by and between eOn and each of David M. Fredrick and Frank Naso. 10.5* eOn's 1999 Equity Incentive Plan and related documents. 27 Financial Data Schedule - Quarter Ended October 31, 2000. - ------------------ (*) Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 333-77021) or amendments thereto, filed with the Securities and Exchange Commission on April 26, 1999. -14- EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JUL-31-2001 AUG-01-2000 OCT-31-2000 1,503 10,427 16,747 1,473 10,730 41,818 6,077 2,545 56,809 8,914 0 0 0 12 47,883 56,809 12,338 12,338 7,446 7,446 6,582 271 0 (1,527) (370) (1,157) 0 0 0 (1,157) (0.09) (0.09)
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